Russian finance ministry readies for fight with big oil over tax

Russian oil firms would have to pay more tax on some of their fields under reforms being prepared by the finance ministry, which is seeking to get more revenue into the budget, according to three officials and a draft of the plans seen by Reuters.Reuters | February 01, 2016, 15:07 IST

MOSCOW: Russian oil firms would have to pay more tax on some of their fields under reforms being prepared by the finance ministry, which is seeking to get more revenue into the budget, according to three officials and a draft of the plans seen by Reuters.

The proposal will be a test of whether the ministry, which has been lobbying for austerity in the face of an economic slump, can stand its ground against the powerful energy lobby, which argues it needs support not higher taxes.

According to the officials, who belong to two different ministries and spoke to Reuters on condition of anonymity, a consequence of the tax reform would be the de facto cancellation the tax breaks on some fields.

That could affect all greenfield, or newly developed, oilfields that currently enjoy various tax breaks, the sources from the finance ministry and the energy ministry said.

According to Vygon Consulting, a total of 198 fields, including brownfields, or long-operating oil fields, currently benefit from various tax breaks.

Among the greenfields with tax breaks are those operated by oil majors such as Surgutneftegaz and Gazpromneft .

The cancellation of the tax breaks on fields is part of a broader reform of the way energy companies are taxed. The main measure will be a profit-based tax in addition to those used now: mineral extraction tax (MET) and oil export duty.

Oil MET and export duty on oil and oil products contributed 6.6 trillion roubles ($87 billion) to the budget in 2014, or 46 percent of total revenues.

The sources could not say how much tax would be raised by the new proposal as discussions are ongoing.

Sergey Yezhov, Chief Economist at Vygon Consulting, said that under the proposed system, greenfields in their early stages would benefit: they will pay no tax compared to 10 percent of the oil price now under the tax break regime.

According to Yezhov, fields with no tax breaks are paying around 42 percent of the oil price in the form of export duty and MET.

But under the new system, a 40 percent tax will apply to all fields once they become profitable, whether or not they previously enjoyed tax breaks, plus a profit-based tax of 70 percent of positive cash-flow.

ENERGY SECTOR

Russian President Vladimir Putin, whose allies hold leading posts in the energy sector, had previously promised not to increase taxes on all economic sectors before 2018.

In a sign of the pressure on the Russian budget caused by the falling oil price, compounded by Western sanctions, Putin's government had to change tack last year.

It de facto increased tax on energy companies by delaying a promised cut in export duty, which brought the budget around 200 billion roubles.

The finance ministry, custodian of the battered Russian budget, argues there is a strong case for getting the energy companies to pay more still.

"Amid severe problems in the economy, Russian oil companies could be seen as fat cats" and there is no need to keep giving them tax relief on fields, said one official, who is not associated with the ministry of finance.

Oil companies have revenues in dollars and pay most of their costs in roubles, so they have benefited from the falling currency, as well as from progressive taxes which fall as a share of revenue as oil prices drop.

FAT CATS THINNER

The energy companies are resisting further tax increases, arguing that more tax means less money for investment in new production. They say that would handicap Russia as it fights to keep production high to defend its market share.

"In future we may lose market share", said a manager at a big oil company, warning against increasing taxes on the sector.

The oil companies support the idea of a new tax in principal, but want a reduction in the overall tax burden under the proposed new system, two officials said.

The Energy Ministry is proposing that the new tax be implemented in stages, with a first stage in which tax breaks are not affected, an official in the ministry said.

The oil industry argues that there is little room for further tax increases. An official close to the energy ministry said the cash-flow of many oil companies may be negative this year because of foreign debt repayments and lower income from refining.

"The fat cats are becoming thinner," the official said.

Ultimately, Putin must decide whom to support: a ministry of finance insisting on budget austerity, or oil tycoons led by his closest ally, Rosneft head Igor Sechin. ($1 = 75.8300 roubles)